RBA: Status quo today, but February is a real possibility - ANZ

FXStreet (Delhi) - Felicity Emmett, Co-Head of Australian Economics at ANZ, notes that after one of the most anticipated Board meetings for months, the RBA today left rates unchanged, but changed their forward guidance to open up the possibility of a near-term rate cut.

Key Quotes

“Specifically, the Bank included the comment “members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand”. The fact that the Bank included this statement despite noting that “prospects for an improvement in economic conditions had firmed a little over recent months” highlights to us the importance of the 2-3% target band for inflation for the Bank.”

“Overall there were quite a few changes in the statement compared with the October one:

• Concerns over financial market volatility have eased with the comment that “volatility in financial markets has abated somewhat”, although the Bank noted that “credit costs for some emerging market countries remain higher than a year ago”.
• The statement acknowledged the recent low inflation print, but repeated that “inflation is forecast to be consistent with the target over the next one to two years”.
• The recent out of cycle mortgage rate increases were alluded to, but the RBA noted that “overall [lending] conditions are still quite accommodative”.
• Importantly, the Bank seems more comfortable with Sydney and Melbourne house price developments, noting the recent moderation in growth.

Overall, today’s statement highlights the importance of inflation to the Bank. That is, despite the prospect of some improvement in activity the Bank seems prepared to ease monetary policy on the back of a lower inflation outlook. This then suggests that a move in December is unlikely. The RBA seems more likely to wait until February when it will have another inflation number which will likely confirm the lower than previously anticipated inflation trajectory. Then the Bank is likely to deliver the first of at least two cuts next year in our view.”

“From here on it seems that a rate cut in February is most likely, and the data (both activity and inflation) will have to be sufficiently stronger to persuade the Bank otherwise.”
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